Why trust matters

In a world of global distrust, where are the true believers? The urgent need to share the benefits of reform shines through in economic reports from both sides of the Tasman.

In Brief

A political backlash against economic reform has eroded trust in institutions around the world.

Reports such as the 2018 Edelman Trust Barometer say reformists need to show benefits will be shared and casualties supported.

Both broad and narrow measures of prosperity point to the need for inclusion.

By Garry Shilson-Josling.

If there’s one thing economists and policy-makers agree on, it’s that
rising living standards eventually depend on productivity growth. Since the
1980s, that meeting of minds has driven economic reforms, which have remade the
Australian and New Zealand economies. And, until fairly recently, their
populations have agreed to go along with the reform agenda.

But the consensus is now in tatters amid resentment over how the costs
and benefits of reform are distributed. Around the world, claims that everyone
is included in gains from free trade, labour market deregulation and
globalisation of business are no longer trusted.

The collapse of trust

Thanks largely to “Brexit” and the election of US President Trump, these
issues of trust and inclusion are now widely recognised. They are a recurring
theme in reports and speeches by business groups, think tanks, public officials
and politicians. The pressure is now on proponents of reform to show how they
plan to support those who miss out on its benefits and suffer its costs.

Australia and New Zealand face challenges that will need further reform.
But ordinary people must regain their trust and rejoin the consensus before
that happens. And trust is in desperately short supply these days.

People are not feeling the benefits of any form of prosperityJacinda Ardern Prime Minister of New Zealand

It is easy to find evidence around the world of a backlash against
reforms that expose people to economic uncertainty. Donald Trump’s election and
the Brexit vote are just the high-profile examples. Closer to home, the mood
has been sullen for a while.

In Australia, the unpopular
WorkChoices labour market reforms laid the groundwork for the Howard
government’s 2007 election defeat. The campaign against carbon pricing, a reform still championed by the
Productivity Commission, tapped into the mood of wariness of change and paved
the way for the Gillard government’s defeat in 2013.

Figures from CA ANZ’s future[inc] long-term prosperity project show the
decline in trust in Australia has been among the steepest in the developed
world. It was worsened by leadership squabbles and political scandals,
according to Karen McWilliams, the Ethics and Sustainability Leader at CA ANZ.

In New Zealand, Prime Minister Jacinda Ardern distilled the mood in her
first one-on-one television interview in October last year. She queries the
point of economic growth when wages are lagging behind inflation. “People are
not feeling the benefits of any form of prosperity,” she argues.

Related: Why Australia's prosperity has fallen in the past decade

Australia now ranks sixth in world prosperity rankings, down from second place in 2007. A new paper by CA ANZ analyses what this means for Australia’s future.

The Edelman Trust Barometer shows the problem is worldwide, but is particularly marked in the US.
The 2018 report, released in late January this
year, found no global recovery in trust in institutions. A “world of seemingly
stagnant distrust” prevails. “People’s trust in business, government, NGOs and
media remained largely unchanged from 2017…”, the report says.

Some 53 per cent of
respondents to Edelman’s 2017 survey believe the current overall system has
failed them.

The Edelman survey-based gauge covers 87% of the world’s population and
feeds into future[inc] reports. The assessment of 2018 results by the marketing
and communication firm’s CEO Richard Edelman is chilling.

“America at the moment is at sea,” he says, pointing to huge drops in
political confidence and in trust in media. In 2017, his reaction was similar.

Institutions have failed to protect people from the global crisis,
globalisation and technical change, he says. Confidence in leadership is
“pitifully low”, with public officials and regulators having the least
credibility of all. The slump in trust has been so severe, Edelman says, that
government is no longer an effective force in leading change.

The conversation changes

The implications are not lost on business leaders and public officials.
Their speeches and reports are now routinely peppered with calls to admit that
some people have been left behind by reform and to say how they will be cared
for.

New Zealand’s Treasury Secretary, Gabriel Makhlouf, addressed the “mood
of uncertainty” in August. Policymakers assumed it was obvious that everyone
benefits from free trade and globalisation, he said, but that assumption was
not supported by the evidence. That reality should be tackled head-on, he argued.

Reserve Bank of Australia Assistant Governor Luci Ellis, in a
mid-November speech, similarly acknowledged the problem, saying inequality and
inclusion are becoming topics of conversation among policy-makers around the
world. A rising star at the Reserve Bank, Ellis too argued that the ultimate
goal of reform has to be on the welfare of the population. “If a specific
reform doesn't deliver that, it ought to be modified, whether through explicit
safety nets or other means,” she said.

The same thought runs through the recent Committee for the Economic
Development of Australia report Australia’s
Place in the World. CEDA’s CEO, Melinda Cilento, says proponents of reform
need to be more upfront about its costs and the uneven impact. The dislocation
to individuals and even whole communities “needs to be called out”, she says.

(Pictured: Melinda Cilento)

The productivity agenda

At its core, the past three decades of reform was about lifting
productivity – the quantity of goods and services produced with an hour’s work.
It’s not about simply working harder but, as Luci Ellis put it in her November speech,
“trying new things, and gradually getting a bit better at what we do”.

Bodies charged with finding ways to do this on both sides of the Tasman
have recently identified their new targets for higher productivity.

In a benchmark paper last year, New Zealand’s Productivity Commission identified
five key areas that should be targeted for reform. They are international
trade, innovation, competition, evidence-based policy, and the labour market,
especially in the areas of skills education, immigration and housing.

The Australian Productivity Commission’s wish-list, in its 2017 five-year
review, is just as wide and deep. Its 28 recommendations range across health
care, better functioning cities, education, market efficiency, and effective
government.

Policymakers clearly have lengthy to-do lists even if they focus just on
this narrow measure of economic progress. But both productivity commissions
insist that productivity growth has wider social benefits, the wellbeing to
which Luci Ellis refers. So it should be no surprise that broader measures of
wellbeing often lead to recommendations that look a lot like reforms aimed at
lifting productivity.

A wider vision of prosperity

The Legatum Institute Prosperity Index is one such broad measure of
wellbeing that captures more than just output per hour. It’s published every
year by the London-based think tank and compiled from a diverse list of
economic and social indicators. They range from unemployment and political
freedom to how safe people feel walking alone.

CA ANZ produced two papers this year digging deeper into the Legatum
numbers for 2016 with the help of some additional data sources. The papers,
part of the future[inc] program, assess what Australia and New Zealand need to
do to ensure prosperity. For New Zealand, the focus is on staying at the top of
the 149-nation ranking. For Australia, it’s about halting the slide from first
place in 2008 to sixth in 2016.

Many of the Legatum recommendations have an economic focus and could
easily have been produced by either of the productivity commissions.

For New Zealand, the future[inc] report says barriers to exports should
be lowered, local government rejigged to promote competition and innovation,
and a strategy developed for skilled immigration. Even a call to preserve the
natural environment is aimed at maintaining the export sector’s green
credentials rather than conservation for its own sake. For Australia, the
future[inc] report urges an embrace of trade, globalisation and competition.

The 2017 report from Legatum, released in late November, showed that
after four years in first place New Zealand has now dropped to second, replaced
by Norway, while Australia has dropped from sixth to ninth, a new low. The
results add a sense of urgency to the reform agenda.

The way forward

The nature of the proposals
from the Australian and New Zealand productivity commissions suggest selling
the benefits of reform may become easier in time. Improved access to education,
better health care, more liveable cities and affordable housing can all lift
productivity.

But they also offer
desirable benefits for individuals. Consensus on their worth should be easier
to achieve than agreement on harder-edge reforms that expose workers to job
insecurity or lower wages.

Some other proposals in the future[inc] reports, while not directly
aimed at productivity, could help to rebuild confidence in economic reform.
Both the Australian and New Zealand reports urge an attack on educational
disadvantage. The Australian report recommends greater transparency in
government decision-making and support for agencies tackling corruption. The
aim is to rebuild trust in governance. The New Zealand report argues for more
affordable housing, not to increase labour mobility, but to strengthen the
bonds holding New Zealand society together.

These proposals offer some hope that trust in the economic reform
process might be rebuilt and more difficult reforms tackled. They are only
recommendations though. Optimism over possible future reforms should be
tempered by a reality check on reform currently under way.

The major reform currently on the table in Australia is a 5% cut in the
company tax rate first proposed in the 2016/17 budget. Its key selling point is
that it will boost wage rates. But Treasury’s modelling shows the increase will
be small, no more than about 1% allowing for inflation and tax, and will flow
through only gradually over a period of decades. And the modelling assumes that
any government spending cuts used to balance the budget will have no negative
impacts.

Whether it’s because of that devil in the detail or just the generalised
distrust of reform, the public isn’t buying it. The latest Essential Research
poll on the subject shows 50% of people disapprove of the company tax cut plan,
while only 30% approve. This suggests the task of rebuilding consensus about
the need for reform has some considerable way to go.

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Garry
Shilson-Josling is a business journalist. He was previously chief economist at
both Australian Associated Press and MMS Standard and Poor’s, and an economist
at the Commonwealth Bank of Australia.